View from an independent Certified Public Accountant

The current Maine tax reform bill LD 1088 has garnered a great deal of attention over the past few months. As a Maine based Certified Public Accountant specializing in taxation, I have a keen interest in this bill and the impact it will have on my clients and on the state’s economy in general.

The State of Maine is in dire need of tax reform. Maine’s top individual income tax rate of 8.5% is the 6th highest in the nation. Maine also has a very narrow sales tax base that derives over 30% of its sales tax revenues from new automobile and construction sales. This makes the state’s revenue stream highly vulnerable to fluctuations in these industries, especially in economic downturns when these items are in lower demand.

The current budget shortfall does not allow for direct and meaningful tax relief for Maine taxpayers. What the state CAN do, however, is collect revenue in a smarter way that allows us to export more of our tax burden to non residents. LD 1088 is intended to be revenue neutral. While revenue is not expected to increase or decrease as a result of the legislation, the bill will shift some of the tax burden away from residents.

The bill’s sponsors aim to expand and stabilize the state’s sales tax revenues by removing current exemptions on a number of consumer and personal property services. The bill also calls for increases to the meals & lodging, real estate transfer and rental car tax rates. The additional tax revenue generated from these changes will allow for a reduction in the income tax rate from 8.5% to 6.5% and the introduction of a refundable tax credit system.

According to Maine Revenue Service data, over 95% of Mainers will see a reduction in personal income taxes under this bill. Even after any new sales taxes are included, about 85% of Mainers will still see lower taxes. The lowest income taxpayers will see the largest percentage decrease (over 21%), whereas the highest income taxpayers will see the lowest percentage decrease (2%), but the largest dollar decrease.

LD 1088 will replace the existing system of standard and itemized deductions with a new credit system. Some taxpayers have expressed concern with the loss of itemized deductions, but the new itemized credit provides similar benefits. Due to the complexity and many variables involved (filing status, exemptions, taxable income, and itemized deductions), it is difficult to quickly quantify the winners and losers from an income tax standpoint, but some broad observations are notable. Unless itemized deductions are unusually high as a percentage of their income, most Maine residents who currently itemize deductions can expect to save tax under LD 1088. For example, it appears that essentially all married taxpayers claiming exemptions for two children who currently report Maine itemized deductions that are no greater than approximately 13.7% of their income will enjoy a tax decrease resulting from the bill. A married couple with two children earning $95,000 who itemized $22,000 on their Maine return would see an income tax reduction of $143. The primary losers appear to be nonresidents (who do not receive the credit) and residents with disproportionately high itemized deductions. It is also important to keep in mind that while most taxpayers will see a decrease in their income taxes, they will also pay an increased amount of sales, meals and lodging taxes throughout the year.

Some people worry an increase in meals & lodging and rental car tax rates could dissuade some tourists and residents from vacationing in Maine. Economic studies provide differing results as to the impact of such an increase but the bill does provide increased funding for tourism promotion to increase business activity in the hospitality industry.

Small businesses whose services previously were exempt from sales tax will incur an additional administrative burden and cost associated with sales tax compliance. However, because 88% of Maine businesses are “flow-through” entities, the owners themselves will receive the benefit of the overall rate reduction from 8.5% to 6.5%.

A similar net tax reduction will be enjoyed by some residents who sell real estate. The higher transfer tax rate applies only to value in excess of $500,000, which coincidentally is the maximum excludable gain for the sale of a principal residence under income tax rules. A taxpayer who sells a home for $900,000 that was purchased for $200,000 will pay an additional $2,240 in transfer tax but will pay $4,000 less in Maine income tax on the gain under LD 1088.

As a tax practitioner, I see first hand the effect tax policy has on business and individual decision-making. Maine’s current tax climate is unforgiving and discourages businesses and individuals from locating or remaining here. LD 1088 attempts to improve the state’s economic climate, stabilize the state’s revenue stream and shift more of the tax burden to non-residents. These are all noble goals that, if realized, will help move Maine forward.

S. Andrew Smith, CPA is a Senior Tax Manager with Baker Newman & Noyes in Portland, Maine. He has over 11 years of tax experience working with individuals and businesses.